All men’s miseries derive from not being able to sit in a quiet room alone. – Blaise Pascal

Posted by: donmihaihai | March 2, 2008

Treats from Warren Buffett and Seth A. Klarman

While Internet reduce the world into one big DOT, it is not easy to read wonderful article very often because while Internet provide the medium, only outstanding doer, writer and thinker can write some great stuffs. This thought can be use in current Internet age where it become faster, almost instantly to read news/opinions, or learn just by googeing but it is only from creditable, sound and intelligent writer that we can get quality reads. Creditable, sound and intelligent writer mostly work in media company or related as Internet force newspaper companies to fight in a much more competitive world, one thing lead to another, if capitalism is ugly, so say by many new age Internet adults who favour individualist, blog, etc… Then we are moving backward because many writers (except those who do not earn a living by writing) do not have incentive to gather and write anymore. Think about going to a blog to read news, gather information which becoming quite common in these few years and taking my blog as an example, with all the craps that I write, how true and what is my competency level? Same goes to other, garbage in garbage out.

2008 Berkshire letter is out so this is my 1st treat. While Warren buffett wrote and said many times before on investing, especially on part where buying business with great moats, but this is the 1st time he write down a more complete piece with sub-title “Businesses – The Great, the good and the Gruesome“. While it is not something new, added with Berkshire own experiences and confessions, it become extraordinary. Well, we don’t get these kind of stuffs easily from book and all kind of researches.

See’s candy is an investor dream and it belongs to The Great. I have been searching for another See’s candy at a reasonable price without any success unknowly at 1st in the earlier days and knowly in more recent years. Not just without success but keep thinking that I have found something when any purchases were made. The latest candidate is Sarin. Despite being nearest comparing to See’s Candy, Sarin will never be as good because of the high amount of R&D, compensation and working capital requirement. But Sarin is indeed in a position to earn high return on capital for a long time because the reasons for current high return on capital are unlikely to change easily. But I won’t be surprise if I fail again. Companies like Beauty China, Celestial and Pfood have the potential to become great but that is a far shot, with ever increasing capital requirement, they are pushing themselves further and further away from The Great to The Good. It is nothing to be ashamed of for not being the best of the breeds as they are rare.

As for the good, name like Brightworld, Full Apex and Micro Mech easily ‘pop’ out of my mind. Unlike the current surge of textile companies coming to list in SGX, SP Chemicals can be a good as long as it is well run. Brightworld will be selling their machine with every higher price with each new innovation while Full Apex ride on the wave of branded bottle drinks which will ensure it to earn good but not great return. Micro Mech actually seen to be like Berkshire Israel acquisition Iscar, a mini version of course. Can Micro Mech rain in billion of sales? I don’t think so if Micro Mech is targeting at the same kind of return. Micro Mech is going to be a small and niche company for a long time.

While I never seek to find and own Gruesome type of companies, One Gruesome type company I owned before and get out with a huge gain thank to market is UMS, all the growth and high ROE prove to be like “Roman Candle”. Jurong Tech is another good example. The question to ask for these companies should be, with the access to market and all earning earned, poured back, shareholders are getting a bigger pie each additional year or not? Without the access to market, where will the company be? Companies like Midsouth, Jaya and TPV can easily fitted in as “Roman Candle” and potentially Gruesome. With no different products once it reach certain quality requirement, Midsouth will be fighting on price and service provide to their customers, especially on their truck customers where increasing, Midsouth will be told to hold more working capital. Without the current super upcycle, Jaya will not be earning such extraordinary profit as there is basically no different renting a vessel from Jaya or CH Offshore or buying a vessel build in Jaya yard or ASL Marine yard. Once the world decided that monitor and LCD TV is taking up too much space, TPV light blackout and candle burn off. Can TPV find another segment of business to replace it? It won’t be easy, just as I find out that being the biggest with huge economics of scales does not equal to generating high ROE with high free cashflow.

While it is not so simple to just dump companies at 3 baskets label The Great, The Good and The Gruesome, it is fairly easy to understand what they can bring using WB “saving account” example : The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pay an inadequate interest rate and requite you to keep adding money at those disappointing returns. So high ROE(or return on capital employed, doesn’t matter) matter especially investing and hold for a long time. Sometime the market provide some inefficiently what allow poorly managed companies to sell at a high price(example UMS) but why do I am to bet on that?

There are many more stuffs in his letter and at the end of his letter, WB is still doing his salesman job of advising their products. As like 2007 results, WB is pointing out to Charlie Munger book “Poor Charlie’s Almanack”. So far, about 50,000 copies were sold. It means that unlikely more than 1 million peoples in this world read Charlie 10 speeches. That is crazy, more people must read it. Those 10 speeches turn my thinking upsidedown despite not understand most part of the speeches. I am planning to take up the challenge and re-read it again in the 2H of the year, to see if I am still standing there refuse to move forward or able to understand more.

In the same day, I am treated with Seth A. Klarman’s Talk at MIT. It is a pretty long talk (I always wish for long talk if it is a good one plus good speaker and super short one from lousy speaker and bullshit stuffs) but the most interesting part is :

“Rather than abandon their theorizing to study Buffett exhaustively to see what lessons could be learned, too many people cannot bear to re-examine their faulty theories.” While he is pointing out to the academics during the speech, it is very appreciable to stock investing.

Investor buying stock is actually a bet on conviction, a conviction that I am right. I can ask all type of questions related or unrelated to the stock but end of the day, I will give an answer to every question to the best that I can, thinking that I am right with the answers as well. An investor who has too many questions while holding on to stocks, is very danger to emotion run if the market turn against him because that is the time where investor seriously need to held close to our conviction. But that does not mean that our answer to questions, thinking, and conclusion cannot be wrong and change. I keep changing my thinking, sometime a small bits, sometime the whole pie even after I make my purchase and adjust according to new conviction, sell if need to.

But I guess many refuse to do it, knowly or unknowly, to re-examine if their initial conclusion is faulty. What make worse is that in local stock investment, with a surge of blogging and forum interaction. Asian value where face are important, many refuse to eat back their words upfront. Some may do it at the back which I don’t know, but many just hold on to the stock or views hoping something wonderful can happen. While it may seem to be ok or whatever, when it happen, conflict of thought and action, etc can have bad consequences in future where new stocks is being examine.

It is easy to say to be rational but doing it is a totally different kind of thing just like the best way to learn stocking is jump straight into the open sea without a second thought. Swim or die.

The current market volality proves to be a good period for investor. Despite not adding new name to my holdings, few of my holdings jump from small % of my portfolio with 2 becoming the largest and 2nd largest % of my portfolio. What an unexpected changes.

It is a tiring week. Reporting season finally consider ended. I think my current system of reading financial statement is not working very well in term of time management as I expand the number of companies I watch. Let see if I can come out with a better system preparing for even lesser time starting from 2009.